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My goal is to give you a basic understanding of what stock options are all about without hopelessly confusing you with unnecessary details. I have read dozens of books on stock options, and even my eyes start glazing over shortly into most of them.
Auto-Trade is a service offered by several on-line brokers. Auto-Trade makes it possible for an investor to carry out an options strategy in his own account without becoming an options guru or making all the trades on his or her own.
Never buy a mutual fund unless it is a no-load index fund with the lowest cost structure. (I will tell you where to find it later.)
Most smart people have set up a Roth IRA, 401(k), or other qualified retirement program. For some of them, it may be the only stock market investment they own.
In spite of the odds against winning, many people seem to like to invest in individual stocks – sort of like picking horses at the race track.
The 10K Strategy is my favorite investment strategy. I have used it to make an average of over 50% a year for three out of four consecutive years. I have now added a twist to the strategy so that annual returns might be less than those years but there should be a much higher likelihood of its succeeding.
Exchange-Traded Funds, or ETFs, are index funds that trade just like stocks on major stock exchanges. All the major stock indexes have ETFs based on them, including: Dow Jones Industrial Average (DIA), Standard & Poor's 500 Index (SPX), and Nasdaq 100 Composite (QQQQ).
Learn about some of my favorite stock option resources.
Terry’s Tips carries out an options strategy designed to significantly outperform the market and other conventional investments.
The strategy does not require picking the right stocks or timing the market. It primarily trades options on the S&P 500 (SPY) and can be used in an IRA.
Amid
the giddiness over solid earnings from the big banks, you may have missed the
lousy earnings report from insurance giant Progressive (PGR) on Thursday
morning. Earnings plunged 90% from a year ago and fell 10% shy of estimates.
Revenue came up a billion dollars short of expectations. The company also swung
to a loss in September due to payouts for Hurricane Ida. Analysts apparently
weren’t paying attention, as there were no upgrades, downgrades or target price
changes issued after the news.
The
stock didn’t do much after the report, falling less than a percent on Thursday.
On Friday, the shares gained that all back – and more – and closed right on
their declining 20-day moving average. Despite the rebound, PGR has been
trading sideways for three weeks after suffering a 6.2% drop in September that
was guided by the 20-day. All relevant moving averages sit at or above the
stock price, ready to lend resistance. We are therefore playing a bearish call
credit spread with the short call sitting above PGR’s 20-day moving average.
If
you agree that PGR will struggle with its 20-day moving average (blue line in
chart) line in chart), consider the following trade that relies on the stock
remaining below 92.5 (red line in chart) (through expiration in five weeks.
Buy
to Open PGR 19Nov 95 call (PGR211119C95)
Sell to Open PGR 19Nov
92.5 call (PGR211119C92.5) for a credit of $0.80 (selling a vertical)
This
credit is $0.05 less than the mid-point
of the option spread when PGR was trading at $91.25. Unless the stock falls
quickly from here, you should be able to get close to this amount.
Your
commission on this trade will be only $1.30 per spread. Each spread would then yield $78.70. This trade
reduces your buying power by $250 and makes your net investment $171.30 ($250 –
$78.70). If PGR closes below $92.50 on
November 19, both options will expire worthless
and your return on the spread would be 46% ($78.70/$171.30).
Cloud
infrastructure and software provider Oracle (ORCL) has been weathering the
market’s recent storm better than most. While the broader market has struggled
since the start of September – the S&P 500 is down 3% - ORCL has thrived,
gaining 6%. In fact, the stock closed at a record high on Friday. That move
pushed the shares above the top of a trading range between 85 and 92 that has
been in place since early July.
ORCL’s
recent earnings report on Sept. 13 was in line or beat both analyst estimates
and guidance. The stock dropped 3% the day after the report, which is typical
of the stock’s post-earnings performance. So is the subsequent strong recovery,
as ORCL is up 9% since the initial drop.
Likely
helping the cause were a few target price increases. It’s notable that analysts
may be jumping on ORCL’s bandwagon. In September, just six of 30 (20%) covering
analysts rated ORCL a buy or better. Today, 26 of 36 analysts (72%) are in the
bullish camp.
We are playing a bullish put credit spread with the short put sitting just above ORCL’s 50-day moving average. This trendline will likely beak above the short strike at 90 in the next few days based on the stock’s recent strength.
If
you agree that ORCL will stay above 50-day moving average ( (blue line in
chart) line in chart), consider the following trade that relies on the stock
remaining above 90 (red line in chart) (through
expiration in six weeks.
Buy
to Open ORCL 19Nov 87.5 put (ORCL211119P87.5)
Sell to Open ORCL 19Nov
90 put (ORCL211119P90) for a credit of $0.45 (selling a vertical)
This
credit is $0.03 less than the mid-point
of the option spread when ORCL was trading above $94. Unless the stock rises
quickly from here, you should be able to get close to this amount.
Your
commission on this trade will be only $1.30 per spread. Each spread would then yield $43.70. This
trade reduces your buying power by $250 and makes your net investment $206.30
($250 – $43.70). If ORCL closes above
$90 on November 19, both options will expire worthless
and your return on the spread would be 21% ($43.70/$206.30).
As
its ticker symbol implies, Salesforce.com (CRM) provides cloud solutions for
customer relationship management needs. CRM reported earnings in late August
that blew away expectations on both the top and bottom lines. The report was
met by the usual round of target price increases that reached as high as $340
(CRM closed at $260 on Friday).
The
stock gapped higher after the report and extended as much as 5.5% higher the
next day, eventually closing with a 2.5% gain. But the shares then sagged,
joining the rest of the market in the early-September swoon. In fact, CRM fell
more than 8% from its post-earnings high.
But the shares appeared to find a bottom last week, thanks to the support of the 50-day moving average. Since turning higher in May, the 50-day has supported pullbacks in July and August. CRM has been stepping higher since a low in early March, putting in a series of higher highs and lows in a rally that has covered nearly 30%. This trade is relying on this trendline support holding for the next six weeks, as the short 250 put of our credit spread is just below the 50-day.
Buy to Open CRM 29Oct 245 put
(CRM211029P245)
Sell to Open CRM 29Oct 250 put (CRM211029P250) for a credit
of $1.10 (selling a vertical)
This credit is $0.02 less
than the mid-point of the option spread
when CRM was trading at $260. Unless the stock rallies quickly from here, you
should be able to get close to this amount. Your commission on this trade will
be only $1.30 per spread. Each spread
would then yield $108.70. This trade reduces your buying power by $500 and makes
your net investment $391.30 ($500 – $108.70).
If CRM closes above $250 on October 29, both options will expire worthless and your return on the spread would
be 27% ($108.70 / $391.30).
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Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses. Please read Characteristics and Risks of Standardized Options before investing in options
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